The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A leading accountant yesterday urged the Government not to enact reforms that would increase the existing 30-40 per cent tax burden on Bahamians, warning that many were “at their breaking point right now”.

John Bain, managing partner of UHY Bain & Associates, the Bahamas partner in the UHY accounting and consultancy network, called on the Government not to increase tax rates in its bid to close the fiscal gap, but instead do so through expanding the economy and broadening the tax base.

Hinting that Value Added Tax (VAT) may not be the best solution, given that it was an indirect ‘hidden’ levy on consumption that would potentially increase the burden on many Bahamians, Mr Bain said his estimate that people paid 35-40 per cent of their income in taxes was “conservative”.

Speaking after a global UHY study of 26 countries that found that increasing taxes, as a means to plug budget deficits, was driving investment and human capital from Europe to Brazil and other ‘emerging’ economies, Mr Bain said the results showed the Bahamas needed to ‘hold the line’ when it came to indirect tax rates.

“The main lesson is that tax increases, by themselves, to increase government revenue is not the answer,” he told Tribune Business.

“The expansion of the economy and trying to find other, more creative ways of raising revenues in the Bahamas is more important than taxing people. The message I want to get out is not to increase the individual or corporate tax burden.”

Noting that increased taxes on businesses deterred companies from hiring, Mr Bain said his estimate of a 30-40 per cent tax burden in the Bahamas was “conservative”.

While average tariff rates were in the vicinity of 33-42 per cent, he pointed to the 85 per cent top rate levied on new automobile imports, the taxes on gasoline, and those imposed on products bought at the food store.

The Bahamian taxation system is a regressive one, given that lower and middle class persons pay a higher proportion of their income in taxes than the upper class, due to the fact it is based on consumption and the cost of living.

Mr Bain said Bahamians felt taxes every time they purchased something, although they might not realise it.

Suggesting that the Government broaden the tax base, Mr Bain said: “If the Bahamas government does go ahead and raise taxes, which I don’t think they will, we are right at the limit.”

He pointed to the 2010-2011 Budget’s tax increases on the auto industry, suggesting these had the effect of diminishing tax returns, because the rates were above the level that would ensure optimal collection.

Combined with the recession, this spurred Bahamians to switch from buying new to used cars, having “a stagnating effect on car companies”.

“That took us almost to the point of no return,” Mr Bain told Tribune Business, adding that when Stamp Duty and freight costs were factored in, it cost double Miami prices to buy a new car.

“We’re at our breaking point right now,” he added, saying that high unemployment meant those in work were having to pay more in taxes to the Government and feeling the “squeeze”.

“The Bahamas, being a no-direct-tax destination and dependent on indirect taxes, needs to be aware of the consequences of higher taxes,” said Mr Bain.

“The population is highly taxed indirectly, which results in the burden of taxation being skewed unfavourably towards the poor and middle class. The Bahamas government has promised a revamping of its taxation system. As some of the residual income of some European countries is astounding, this [UHY] report and the comments by the country partners should be considered at the discussion phase of taxation reform in the Bahamas.”

He added: “The first response to the impact of taxation on decision-making is concern about investment. But over the long run, the more significant impact may be a brain drain, with taxation driving talented professionals, especially those who are relatively young and mobile, to jurisdictions with more appealing taxation ,translating into more attractive income.

“There is a tipping point in everything and we have to be very careful in the Bahamas to take results like this into account, because increases in taxation that seem to provide a temporary breather can be a long-term threat to the very economy we are trying to build. Conversely, lowering the rate of taxation may be among the smartest moves we can make to retain talent and attract investment.”